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Brazil – A Tough Nut to Crack

Brazil recently overtook the UK to become the 6th largest economy in the world; growing by 2.7% last year while the UK economy contracted by 0.8%. Brazil is part of the well known group of countries known as the BRIC countries (Brazil, Russia, India and China) which are expected to become the future super powers of the world (it is predicted they will overtake the G7 countries by 2027). Brazil is also currently the largest economy in the South American region which is finally starting to sort their economies out. It also surprisingly had the 8th largest number of billionaires in the world last year, far more than any of its neighbours could boast.

Brazil overtaking the UK in GDP.

Brazil weathered the financial storms of the world recession and was one of the first emerging economies to spark a recovery in 2010. In fact, when investors were unsure of where to place their money after the crisis, Brazil’s economy became the in vogue choice, with millions of capital poured into the country. An economy supported by ever rising commodity prices and generating a new emerging middle class can also boast the hosting of two big international events in the near future – The World Cup in 2014 and The Olympics in 2016. Brazil is in fact starting to look like a present world power rather than the “could-be nation” tag that still hangs around its neck.

Brazil logo for the world cup they are hosting in 2014

This is a big step forward from Brazil’s recent past, where dictatorships ruled, inflation remained at a constant high and poverty was widespread. Now a period of political stability with democratically elected governments has seen the country realise its true potential and emerge as a true global power. A decade ago, Brazil was wrapped up in Argentina’s default and the widespread debt of South America, leading to its credit status to be labelled at “junk” level. But ten years on and Brazils bonds have now been upgraded and are attracting investors. This has been boosted if anything by the Euro crisis, as investors scared of a Greek default are looking to find safer markets for their money. Where would be safer than a top rated emerging economy, as the average debt of an emerging country is now lower than that of a developed country.

But dangers lie ahead for Brazil. Growth last year of 2.7% when compared to previous rates of around 4-8% showed an economy slowing down, with projections for 2012 at a disappointing 3.5%. There have many excuses put forward; the euro crisis has slowed down demand for Brazilian exports, falling commodity prices (which fuel Brazil’s economy) and a strong currency that doesn’t help an export lead country. But despite these factors damaging their economy, Brazil has still got to share the blame for slow growth.

Economic Growth for Brazil between 2000 and 2015

Brazil remains an uncompetitive country, ranking 53rd in the World Economic Forum index (behind Malta) and heavily losing out in its own back yard to China (despite themselves experiencing increased labour costs). A current account deficit at 3% of GDP means Brazil might also have to rely on foreign finance to pay for future projects (like the World Cup and Olympics) and with a euro default still possible and the USA looking to tighten its budget, these funds may become harder to attain. Real interest rates also remain the highest of all emerging nations at around 4%, which deters investors and makes loans for smaller firms near impossible. An article on the economist http://www.economist.com/blogs/freeexchange/2012/01/emerging-economies found that by looking at the monetary and fiscal policies of emerging countries, Brazil had little room to improve growth through stimulus. One main factor for this is a debt to GDP ratio of 65% and budget deficits of 3% of GDP, meaning Brazil has a lot of debt for a developing nation and are currently just adding to it when growth should be helping to cut the debt

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Shows how Brazil doesn’t have much room in its fiscal or monetary policy to induce growth

Brazil’s biggest problem however is their benefits system. Brazil has a younger population than any of the G7 member countries, yet spends an incredible 13% of GDP on pensions, more than any of those countries barring Italy (whose share of old people is three times that of Brazil). It has an unenviable ratio of 35 pensioners to every 100 workers (a worse ratio than that of the USA). Looking into the pension schemes, Brazil is incredibly generous as well, replacing 75% of average income. There are even options of early retirement with lower yet still bountiful pensions, leading to Brazils retirement age to be on average 54 for men and 52 for women and a tenth of 45 year olds already on their pension. This compares very unfavourably with child benefit schemes, where every family with a child receives 115 reais, whereas a family with a member over 65 would receive almost five times as much. This leads to almost a third of children living under the poverty line in Brazil but rarely any over-65 year olds. The Brazilian government is already trying to push through a bill to cap benefits at private sector levels, but this is only the start and Brazil will need radical changes if it doesn’t want to bankrupt the future of the nation.

Shows Brazil’s spending on GDP compared to amount of old people in the country

If Brazil could free up this money, then maybe it could increase investment in the infrastructure and education from its poultry 20% of GDP. New airports and roads are needed as well as more high paying jobs, not a nation of pensioners collecting unaffordable benefits. The inequality rife in Brazil will also needed to be fixed, as even though progress has been made, Brazil still had a Gini rating of 0.6 in 2009 (where 0= Total equality and 1=total inequality). New progressive taxes and better methods at stopping tax evasion (predicted to cost the government 2.5% of GDP) could help improve equality and lead to a nation that can truly call itself a developed country. A free-trade agreement with the rest of South America would also benefit Brazil massively, as their biggest customers remain in this region and could create the sort of benefits that German exports achieved when joining the EU. But that would require tearing down the barriers of trade that have been a part of the Brazilian economy for years and keep inefficient companies afloat through subsidies.

The map shows Brazil to have a Gini rating of between 0.55 and 0.59

Brazil have achieved much in the last decade, where a stable government and strong growth have lead its economy up the rankings to 6th in the world (with aspirations for 5th place) but without strong reforms we could see the country’s economy slow down, with growth last year already well behind the rest of the BRIC countries. The problem is Brazil tends to only make the big reforms when times are tight and the need for change is urgent. Brazil will need to buck the trend and push through reforms now while they can still take effect, otherwise the economy could slow down when growth is urgently needed to become a true world power.

Looking at constant growth for 2012 and 2012, Brazil has lagged behind its fellow BRIC members – Russia, India and China

Brazilian reforms like Brazilian nuts are tough to crack, but they are a must if Brazil is to realise their potential.

Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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